AUDITED for the first time -- some questions

I have been filing Federal and California taxes for the last 18 years. For for the first time ever, I have received the honor of being audited :) I received the letter 2194 (SC),
form 4549, etc. for tax years 2005. Basically, I have always done my taxes myself, the old pencil-paper- calculator way. My 2005 taxes are very boring: -- only W-2 income (self & spouse) -- a small amount of interest. -- No other income, no adjustments. -- Only personal exemptions and itemized deductions -- itemized deductions consist SOLELY of state taxes, property taxes, and mortgage interest -- ABSOLUTELY nothing else.
Per IRS, I am subject to AMT just based on high California state taxes, and property taxes. No ISO, no option income of any kind, no "funny" income, no other deductions, no tax shelters. Absolutely nothing else. Anyway, IRS was kind enough to complete the form 6251 for me, and walking through the lines, I agree with their calculations, so I will pay. More or less happily (I mean, I have not cursed even once since receiving the notice, and I can afford to pay the AMT). So, my blood pressure is not high :) I have a couple of questions.
1. I file my taxes in California; it goes to Fresno, CA but the audit letter is from Andover, MA. Just curious, why is being handled from an office across the country? 2. Letter includes name of an IRS employee "Mrs. XYZ" (it actually says Mrs., not Ms., how quaint!), and lists contact hours as 4:30PM to 11PM (but does not say time zone). That is an amazingly odd hours to contact! Is IRS outsourcing the audit job to accountants in India, sitting in Bangalore? That would explain the odd hours! 3. The notice also includes "Failure to file / failure to pay - IRC 6651" penalty equal to 10% of the AMT amount (IRS otherwise agrees 100% with my tax filing; only I never did AMT before, and they figure I needed to do it for 2005). I DID file taxes in time, I paid in time (through payroll deduction, and one extra payment on Jan 15, 2006). When I filed 2005 taxes in 2006, I received a small amount of refund. So, is there anyway IRS will waive the penalty? Can not including AMT form 6251 be considered a failure to file/pay? The 10% penalty seems steep. What "magical words" should I write in a letter, or should I utter on phone, to plead that the penalty be waived? Based on my family's income, I CaN NOT say that the penalty amount of less than $500 is a hardship on me. Still, if they waive it, that's a couple Chinese take-outs for me & my family :) So, how do I plead? 4. The letter also includes INTEREST computation, at 7% (SEVEN!) COMPOUNDED from 4/15/06 through June, 06, and at 8% (EIGHT!) COMPOUNDED from July, 06 through now + 30 days (yes, all the way to next month!). Boy, where is IRS earning that high rate of interest? Even the best online savings account have returned between 4.5% and 5% during this time, and the yield on US treasury's 26 week bill auctions have been only about 5.3%. How can IRS justify charging such a high interest rate? Anyway to get IRS to use a more reasonable interest rate, like 5%? Can the interest be waived, or abated, fully or partially, under any circumstances? 5. One of the forms says "Can you pay the full amount within 120 days?" My answer is YES, and YES means no need to setup install payment plan. Fine. But will the interest continue to acrue during this time, if I pay within the 120 days? Or does it mean I get 120 days, interest-free, to pay? 6. If interest continues to acrue, suppose I paid right away, within the next 3 to 5 days (mailing time from California to Andover, MA), will IRS refund me the excess interest from the payment date to the next month? (They have computed interest all the way to now + 30 days). 7. Are the interest and penalty going to be be deductible on my taxes for 2007, when I file it in 2008? Or should these be deducted on 2006 taxes which I will file in a month, assuming payment was due on 4/15/06? 8. Quite unsually, all the material inside is nicely laser printed, even the signature of the "Operations Manager, Examinations" (boss of Mrs. XYZ listed on page 1) is scanned image, not a real signature. However, the whole package was mailed in an envelope, which was HAND- ADDRESSED IN INK, in real-old-lady handwriting style, with so much ornamentation around the serifs of letter "R" and what not. Kind of like one of those old archived documents from 2 century ago. I suppose some bored old lady in mailing department at IRS, or perhaps the auditor Mrs. XYZ herself, like to doodle on outgoing audit notices! Anyone else receive hand-addressed letters from IRS?
Thanks a lot for your answers, and discussions. I welcome your suggestions, tips, guidance, and what-have-you. Even flames welcome! (but our esteemed moderator will likely snip that!) Average Citizen from the Golden State
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citizen snipped-for-privacy@yahoo.com wrote:

More efficient to centralize volume operations in a particular tax issue area.

If that EE actually exists, it's her preference. Conversely, certain IRS ops are permitted to use pseudonyms on letters. One advantage is when you call and ask for that person, they know what kind of a letter you have (like here, the AMT project). Another is not having the name/number in a volume operation documented, because if you call that person and he/she is real helpful, and you pass it along, that person could get flooded with ordinary inquiries.

Could be a nigh-shift project.

I doubt it. Congress, fwg media alarm, would go ballistic.

Your 1040 sounds as though filed 2 months late. This penalty is not for failure to compute AMT.

One can't assume that, as it's possible your return should better have been selected for other issues, and it's a mistake to have limited to AMT. Once they do so, the return is "closed" after you sign the 4549. So, unless you have a good argument on why filed late, I'd be careful on pursuing relief from the penalty. Other people, like a manager, may review your arguments, plus rest of the return, and decide that the penalty issue and anything else be referred to your local Area Office for audit completion.

Interest rates are set by law, with certain Treasury rates as a base. Compounding was recently added by Congress. No way can IRS ignore the law as to statutory interest rates.

Interest accrues until paid.

They'll refund interest you pay between date paid, if before the computation date in any notice or 4549.

No.
That can be a cost issue, as in no budget for the technology to print labels/envelopes cheaper, or simply the items inside have your SSN which will show through a window envelope. Too expensive to fix that problem.
Fred F.
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TxSrv wrote:

What? still using fake names? I thought congress made em stop that practice long ago. I still use the name Sue Samples, a name used on correspondence from Atlanta long ago as wife of Junior Samples, my mythical and hypothetical taxpayer when I with to project what if scenarios for a return. (Their kids are Modine, Buster, Cleo, and Sudie - the baby)
ChEAr$, Fred, Harlan
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Harlan Lunsford wrote:

Congress merely wrote restrictions in 1998 into law, matching internal rules IRS used. Apparently inconsistently. One exception is physical threat. The Center I'm think of used a nonexistent manager's name on all exam letters. Work 50,000 cases a year, bound to be a few threats. Or perhaps even they stopped since 1998.
Fred F.
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Last year I was underwithheld and filed late (with an extension). I got a letter from the IRS that said basically "You owe $80 interest already and if you pay it within a month we won't bill you any more." Seth
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<<Snip the details>>

Who knows why the notices come from where they come from, but yes, they often come from a different service center than where you file to.

They have flex time, what can I say. Chances are you'll never get to talk to that person anyway.

Yeah, your situation gives rise for the penalty to be abated. Ask for it, multiple times if need be. They can't do anything about the interest though.

Failure to pay, for sure. But only for that amount of tax.

Explain your story as you laid it out earlier, explain that you now understand that part of the tax code and have taken steps to get it right from now on, and ask for the penalty (and be specific which ones you want) to be abated (and use those words).

Keep the letter simple. A typical format should flow like this:
Address to IRS Your name(s), address, etc Tax Year and Form #
Request abatement of penalty. Layout your case (I'd explain it much like you did earlier in the post) Request penalty abatement again, spelling out which penalty and the dollar amount. Offer to provide additional information to resolve the issue in your favor. Thank them for their time and effort in resolving things in your favor. Enclose check for what you believe you do owe.

Statutory most likely.

Congress told them they could. But, for an unsecured loan, it's quite cheap. FYI, don't rant about the interest rate in your abatement request.

No. They can, and often do, waive/abate the penalties all the time, but they can't do diddly about the intrest rate.

The interest is lower on people on installment plans, but it's probably best to pay it off, as penalties also pile up.

Interest is generally computed through a "pay by" date, that should be on the notice.

Nope and nope. It's considered personal interest - no deduction. There's never been a deduction for penalties.

Yeah, technology has never caught on at the IRS. It wasn't all that long ago that they hand stamped the letter with a signature stamp.

Oh? I see they transfered her to your area..........

And you would do differently at 10:30 pm at the office?

Yup. Used to scare the crap out of me in the early days. Now it's like "what the hell do they want now".

I have a generic abatement letter that has met with some success in the past, if you want to utilize the format. Drop me a line and I'll shoot it to you.
--
Paul Thomas, CPA
snipped-for-privacy@bellsouth.net
  Click to see the full signature.
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citizen_average wrote.....

First time for everyone, ;-)

The best business practice if consolidating Wage and investment taxpayer case processing in a couple of centers nationwide

Not yet, many Centers run 20 hours a day, though taxpayer contacts are generally limited to 8 or 9 pm ~TAX PAYER~ time, since your 3 hours behind, the tax examiner should be bright eyed & ready to talk to you even at that late hour.

Possible first time error as basis to reasonable cause consideration to abate the penalty.

Possible...
State the facts as they are, hardship (inability or ability to pay is not relevant)

The US treasury is collecting what it's TOLD to collect.

See above

NO..
NO..
YES..
NO..
Possibly, depends on the magnitude of the -accrued~ interest projected forward, below a certain dollar amount it will be cleared under tolerance, above, you might get a check in the mail for being so prompt in your consent to the assessment & payment of the preacccrued interest

NO
NO, Never

Automation to generate the majority of the documentation for the case. Many of these cases are generate daily, and out going correspondence can be on the order of 500 to 1000 cases a day. Assessment proposals need to be ~signed~ by an appropriate graded official. Higher paid, hence the automated signature.

Suprised they did not use a windowed envelope, but on occasion they run out, tight budget's ya know. So she used a standard envelope & hand addressed it.

Welcome to the world of AMT tax creep, Congress needs to get of their butt's and fix this, or at least be honest with the general public about TAX INCREASES. << ======================================================= >> << The above is intended for educational purposes only. >> << It does NOT constitute legal OR professional advice. >> << It cannot be used by any taxpayer, for the purpose of >> << the purpose of avoiding penalties that may be imposed >> << upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Yep. It keeps coming up. Most congress critters agree that it is grossly unfair, hasn't been updated in years, and needs to be overhauled or eliminated altogether; yet, when push comes to shove, and they realize that to do any of the above will reduce the federal revenue by a huge amount, and the only way to make up for that is to increase taxes (or reduce spending) they all shrink into the wood work. We can keep hoping - but don't hold your breath.
-- -Ernie-
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citizen snipped-for-privacy@yahoo.com wrote:

It's more efficient. ;)

"I have always done my taxes myself, the old pencil-paper- calculator way. I have never been subject to AMT before, and didn't realize I needed to fill out a Form 6251. I am now aware that I need to use the Form 6251 to prepare a complete and accurate return. I respectfully request that you waive the assessed penalty based on reasonable cause."

None of the above.

There should be a "pay this amount by this date" bit in the letter. The IRS has already calculated interest through that date. If you pay significantly before or after, they might refund / bill you.

Neither. Interest and penalties aren't deductible. Don't forget to use the 6251 when you do your 2006 taxes. Phoebe :)
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citizen snipped-for-privacy@yahoo.com wrote:

Dear Mrs Average Citizen, (grin)
IRS has offices in many cities which deal with specific areas of tax law. I send tax returns to Austin, Philadelphia, Atlanta, Ogden and whereever else "they" desire. Specialization, you know.

Mr and Mrs is not "quaint", but accepted usage; always has been. No, they do not outsource to India, but maintain those extra hours to benefit you, one of their best customers.

Yes, I think you have a very good case for getting them to waive this first time failure to include the AMT. After all, they are human. Well, many might even argue with this I suppose.

Because it's the U S congress which sets the rates, and they are so much better than borrowing the money at your local bank.

No way.

The interest will be calculated until a date maybe 25 days beyond the final letter they send to you.

If you want to send what you think it should be now, go ahead and perhaps save a wee bit of interest.

No deduction ever for penalties (which I hope you can get waived since this is your "first time offense", but interest is inevitable.

It was the little old lady who did the examination who sent you the results; not uncommon.
I'm pleased to see that you have as much understanding of what's happened so far. So many taxpayers haven't a clue.
ChEAr$, Harlan Lunsford, EA n LA
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Harlan Lunsford wrote:

Harlan, the proposed penalty is 6651, late-filing. The facts hint at a refund return with -0- tax, filed late. AMT as the only tax thus triggers a 10% (two-month) late penalty. Orig poster needs to consider if this is the case, and any reasonable cause for originally filing late. Nothing to do with AMT.
Fred F.
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citizen snipped-for-privacy@yahoo.com wrote:

[...]
Aren't you glad at least that the AMT standard deduction amounts were extended for one year into 2006 at the temporary higher rates? Your AMT was not specifically based on high CA state taxes (actually, the property taxes in CA for long-time owners are pretty darn low compared to some other populous states, thanx to Prop 13). There are AMT deferral items (such as ISO's and the other "funny" ones you mention) and AMT exclusion items (such as your state taxes and personal/dependent exemptions), you got hit with a lot of exclusion items. Since the rest of your post addresses penalties, interest, and IRS administrivia, I'll only comment to say, I'm beginning to see the wisdom in paying for a professional to review AMT issues if one even thinks they will be visiting that fabled land. As frequent contributor Paul Thomas has commented (and perhaps others before), the AMT may well become the default "flat tax" if not indexed to inflation. -Mark Bole
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Thanks to Taxman, TxSrv, Phoebe and Paul Thomas for detailed answers to all my questions. Your answers have confirmed my conjecture. -- nothing doing about the interest; rates and compounding mandated by Congress. -- penalty abatement possible; does not hurt much to request it in a short, simple letter. -- do the AMT for 2006, even with boring tax details!
I have a two minor followup questions:
1. One of the responses seemed to imply that if I pay now, and sign the Form 4549, it means that this tax year will be CLOSED. Is this true? I mean I do not suspect anything else wrong with my taxes, but knowing for sure that this year will be closed and settled is a "good feeling" (Like I said, never been audited before). 2. For the 2005 tax year, the tax return was due on 4/15/2006. My return was received by IRS in 6/1/2006 -- I had filed VALID, TIMELY EXTENSION request. Note that I was DUE A REFUND, and IRS gave me the $500 refund. Of course, with AMT, now I owe taxes. So, is that a timely filing of taxes or not? Is that a failure to file taxes? I would answer those as Yes (timely filing) and No (did not fail to file taxes), but what do tax professionals think? I am NOT going to argue, legalistically, that my penalty should be waived. Just that I never did AMT, that I was told AMT applies when one has special, ISO options (I do have ISOs). And, yes, even with my boring taxes of only (W-2 wage income + small interest + only mortgage, property taxes and state taxes deduction), I would do the AMT for the tax year 2006. Thank you, politicians, for the AMT :( Perhaps California should leave US, and avoid all this :)
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citizen snipped-for-privacy@yahoo.com wrote:

Yes, but pmt not required, only signature + like 30 days time-lapse. However, there are exceptions permitting reopening for serious matters, or a few other non-serious things. If your only tax is AMT, then AMT _is_ the only issue as a practical matter, usually. Forget about this aspect of it, as IRS chose correspondence technique, very likely after perusal of your entire 1040 as best they could.

Obtain a transcript of your account for 2005 to see if it shows they rec'd your Form 4868. By proposing a 10% penalty (2 months), maybe they didn't process any 4868. Do you have proof you filed one? Alternatively, the examiner who did your From 4549 did not review the transcript, and a timely extension is indeed posted there. File 4506-T with IRS, or ask the function working you return for a transcript.
Fred F.
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citizen snipped-for-privacy@yahoo.com wrote: > 1. One of the responses seemed to imply that if I pay now, > and sign the Form 4549, it means that this tax year will > be CLOSED. Is this true?
Yes, but pmt not required, only signature + like 30 days time-lapse. However, there are exceptions permitting reopening for serious matters, or a few other non-serious things. If your only tax is AMT, then AMT _is_ the only issue as a practical matter, usually. Forget about this aspect of it, as IRS chose correspondence technique, very likely after perusal of your entire 1040 as best they could.
> My return was received by IRS in 6/1/2006 -- I > had filed VALID, TIMELY EXTENSION request. Note that I > > DUE A REFUND, and IRS gave me the $500 refund. Of course, > with AMT, now I owe taxes. > > So, is that a timely filing of taxes or not? Is that a > failure to file taxes?
Obtain a transcript of your account for 2005 to see if it shows they rec'd your Form 4868. By proposing a 10% penalty (2 months), maybe they didn't process any 4868. Do you have proof you filed one? Alternatively, the examiner who did your From 4549 did not review the transcript, and a timely extension is indeed posted there. File 4506-T with IRS, or simply ask the function working you return for a transcript.
Fred F.
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